##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 000-15191
 Valley National Gases Incorporated
  Pennsylvania
(State or other jurisdiction of 
incorporation or organization)
    
    23-2888240
(I.R.S. Employer Identification No.)
 200 West Beau Street, Suite 200
Washington, Pennsylvania 15301
 (724) 228-3000
  þ o
  o o þ
  o þ
  Class
    
    Outstanding at February 7, 2007Common stock, $0.001 par value
    
    9,686,959




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##### 



TABLE OF CONTENTS
 PagePART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2006 (unaudited)
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2005 and 2006 (unaudited)
    
    5Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 2005 and 2006 (unaudited)
    
    6Condensed Consolidated Statement of Changes in Stockholders  Equity for the Six Months Ended December 31, 2006 (unaudited)
    
    7Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2005 and 2006 (unaudited)
    
    8Notes to Unaudited Condensed Consolidated Financial Statements
    
    9Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    28Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    38Item 4
    
    Controls and Procedures
    
    39PART II
    
    OTHER INFORMATIONItem 6
    
    Exhibits
    
    39Signatures
    
    40EX-31.1EX-31.2EX-32.1EX-32.2
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM I. FINANCIAL STATEMENTS
 VALLEY NATIONAL GASES INCORPORATED
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2006
    
    
    2006(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,601,458
    
    
    $
    1,511,734Accounts receivable, net of allowance for
doubtful accounts of $1,006,754 and
$1,010,867, respectively
    
    
    20,809,098
    
    
    
    24,194,229Inventory
    
    
    12,910,680
    
    
    
    15,214,598Prepaids and other
    
    
    1,705,700
    
    
    
    1,970,846Current deferred tax asset
    
    
    2,466,329
    
    
    
    2,800,659Prepaid and refundable taxes
    
    
    296,843
    
    
    
    502,453Total current assets
    
    
    39,790,108
    
    
    
    46,194,519PROPERTY, PLANT AND EQUIPMENT:Land
    
    
    2,184,191
    
    
    
    2,207,800Buildings and improvements
    
    
    23,581,309
    
    
    
    24,336,907Equipment
    
    
    118,795,861
    
    
    
    121,657,603Transportation equipment
    
    
    21,545,468
    
    
    
    22,612,590Furniture and fixtures
    
    
    9,613,891
    
    
    
    10,204,905Total property, plant and equipment
    
    
    175,720,720
    
    
    
    181,019,805Accumulated depreciation
    
    
    (63,854,868
    )
    
    
    (67,509,445
    )Net property, plant and equipment
    
    
    111,865,852
    
    
    
    113,510,360OTHER ASSETS:Intangible assets, net of accumulated amortization of
$8,152,506 and $8,621,392, respectively
    
    
    5,023,597
    
    
    
    5,208,491Goodwill
    
    
    54,197,285
    
    
    
    55,654,998Deposits and other assets
    
    
    531,770
    
    
    
    313,832Total other assets
    
    
    59,752,652
    
    
    
    61,177,321TOTAL ASSETS
    
    $
    211,408,612
    
    
    $
    220,882,200
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VALLEY NATIONAL GASES INCORPORATED
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2006
    
    
    2006(unaudited)LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of long-term debt
    
    $
    3,861,915
    
    
    $
    3,853,677Accounts payable
    
    
    12,522,911
    
    
    
    16,626,979Accrued compensation and employee benefits
    
    
    4,967,701
    
    
    
    3,775,432Other current liabilities
    
    
    5,690,648
    
    
    
    5,533,764Total current liabilities
    
    
    27,043,175
    
    
    
    29,789,852LONG-TERM DEBT, less current maturities
    
    
    66,679,000
    
    
    
    64,703,645DEFERRED TAX LIABILITY
    
    
    34,042,445
    
    
    
    35,033,989OTHER LONG-TERM LIABILITIES
    
    
    2,861,058
    
    
    
    3,306,015Total liabilities
    
    
    130,625,678
    
    
    
    132,833,501MINORITY INTEREST IN VARIABLE INTEREST ENTITIES
    
    
    5,171,333
    
    
    
    4,809,701COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, par value, $.001 per shareAuthorized, 30,000,000 shares;
Issued and outstanding, 9,661,724 and
9,686,959 shares
    
    
    9,662
    
    
    
    9,687Paid-in-capital
    
    
    19,867,665
    
    
    
    20,312,223Retained earnings
    
    
    55,434,415
    
    
    
    62,754,865Accumulated other comprehensive income
    
    
    299,859
    
    
    
    162,223Total stockholders equity
    
    
    75,611,601
    
    
    
    83,238,998TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    211,408,612
    
    
    $
    220,882,200
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VALLEY NATIONAL GASES INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedDecember 31,2005
    
    
    2006NET SALES
    
    $
    56,418,116
    
    
    $
    56,781,936COSTS AND EXPENSESCost of products sold, excluding depreciation
    
    
    28,426,906
    
    
    
    27,923,101Operating, distribution and administrative
    
    
    17,443,236
    
    
    
    17,119,331Depreciation
    
    
    2,005,534
    
    
    
    2,176,914Amortization of intangibles
    
    
    219,580
    
    
    
    228,833Merger-related costs
    
    
    
    
    
    
    1,494,585Gain on disposal of assets
    
    
    (27,557
    )
    
    
    (109,674
    )Total costs and expenses
    
    
    48,067,699
    
    
    
    48,833,090INCOME FROM OPERATIONS
    
    
    8,350,417
    
    
    
    7,948,846INTEREST EXPENSE
    
    
    1,181,615
    
    
    
    1,047,527OTHER INCOME, NET
    
    
    (115,348
    )
    
    
    (142,843
    )EARNINGS BEFORE MINORITY INTEREST
    
    
    7,284,150
    
    
    
    7,044,162MINORITY INTEREST
    
    
    187,338
    
    
    
    326,865NET EARNINGS BEFORE TAXES
    
    
    7,096,812
    
    
    
    6,717,297PROVISION FOR INCOME TAXES
    
    
    2,706,102
    
    
    
    2,646,490NET EARNINGS
    
    $
    4,390,710
    
    
    $
    4,070,807BASIC EARNINGS PER SHARE
    
    $
    0.46
    
    
    $
    0.42DILUTED EARNINGS PER SHARE
    
    $
    0.45
    
    
    $
    0.41WEIGHTED AVERAGE SHARES:Basic
    
    
    9,596,067
    
    
    
    9,680,786Diluted
    
    
    9,752,787
    
    
    
    9,840,930
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VALLEY NATIONAL GASES INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Six Months EndedDecember 31,2005
    
    
    2006NET SALES
    
    $
    98,081,347
    
    
    $
    107,392,677COSTS AND EXPENSESCost of products sold, excluding depreciation
    
    
    48,378,808
    
    
    
    52,898,341Operating, distribution and administrative
    
    
    32,880,477
    
    
    
    34,000,297Depreciation
    
    
    3,797,916
    
    
    
    4,212,391Amortization of intangibles
    
    
    458,437
    
    
    
    468,886Merger-related costs
    
    
    
    
    
    
    1,494,585Gain on disposal of assets
    
    
    (65,015
    )
    
    
    (101,617
    )Total costs and expenses
    
    
    85,450,623
    
    
    
    92,972,883INCOME FROM OPERATIONS
    
    
    12,630,724
    
    
    
    14,419,794INTEREST EXPENSE
    
    
    2,072,571
    
    
    
    2,193,936OTHER INCOME, NET
    
    
    (320,541
    )
    
    
    (322,131
    )EARNINGS BEFORE MINORITY INTEREST
    
    
    10,878,694
    
    
    
    12,547,989MINORITY INTEREST
    
    
    444,479
    
    
    
    484,631NET EARNINGS BEFORE TAXES
    
    
    10,434,215
    
    
    
    12,063,358PROVISION FOR INCOME TAXES
    
    
    4,007,690
    
    
    
    4,742,908NET EARNINGS
    
    $
    6,426,525
    
    
    $
    7,320,450BASIC EARNINGS PER SHARE
    
    $
    0.67
    
    
    $
    0.76DILUTED EARNINGS PER SHARE
    
    $
    0.66
    
    
    $
    0.74WEIGHTED AVERAGE SHARES:Basic
    
    
    9,586,274
    
    
    
    9,674,125Diluted
    
    
    9,737,515
    
    
    
    9,838,036
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VALLEY NATIONAL GASES INCORPORATED
 
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
  AccumulatedOther
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in-
    
    
    Comprehensive
    
    
    Retained
    
    
    Stockholders
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Income (Loss)
    
    
    Earnings
    
    
    Equity
    
    
    IncomeBALANCE, June 30, 2006
    
    
    9,661,724
    
    
    $
    9,662
    
    
    $
    19,867,665
    
    
    $
    299,859
    
    
    $
    55,434,415
    
    
    $
    75,611,601
    
    
    $
    Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,320,450
    
    
    
    7,320,450
    
    
    
    7,320,450Exercise of stock options
    
    
    25,235
    
    
    
    25
    
    
    
    151,966
    
    
    
    
    
    
    
    
    
    
    
    151,991
    
    
    
    Tax benefit from exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    220,450
    
    
    
    
    
    
    
    
    
    
    
    220,450
    
    
    
    Non-cash stock compensation expense
    
    
    
    
    
    
    
    
    
    
    72,142
    
    
    
    
    
    
    
    
    
    
    
    72,142
    
    
    
    Unrealized loss on derivatives
designated and qualified as cash flow
hedges, net of tax provision of $91,757
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137,636
    )
    
    
    
    
    
    
    (137,636
    )
    
    
    (137,636
    )BALANCE, December 31, 2006
(unaudited)
    
    
    9,686,959
    
    
    $
    9,687
    
    
    $
    20,312,223
    
    
    $
    162,223
    
    
    $
    62,754,865
    
    
    $
    83,238,998
    
    
    $
    7,182,814
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VALLEY NATIONAL GASES INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedDecember 31,2005
    
    
    2006NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    $
    7,666,878
    
    
    $
    9,785,366CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from disposal of assets
    
    
    122,882
    
    
    
    216,826Purchases of property and equipment
    
    
    (4,937,688
    )
    
    
    (4,353,196
    )Business acquisitions, net of cash acquired
    
    
    (23,715,018
    )
    
    
    (3,031,304
    )Net cash used by investing activities
    
    
    (28,529,824
    )
    
    
    (7,167,674
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    50,914,568
    
    
    
    36,234,348Principal payments on borrowings
    
    
    (27,607,858
    )
    
    
    (38,467,941
    )Proceeds from bank overdraft
    
    
    100,992
    
    
    
    Proceeds from exercise of stock options
    
    
    273,977
    
    
    
    151,991Tax benefit from exercise of stock options
    
    
    124,098
    
    
    
    220,450Variable interest entity distribution
    
    
    (760,950
    )
    
    
    (846,264
    )Net cash provided (used) by financing activities
    
    
    23,044,827
    
    
    
    (2,707,416
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    2,181,881
    
    
    
    (89,724
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    $
    1,322,397
    
    
    $
    1,601,458CASH AND CASH EQUIVALENTS, end of period
    
    $
    3,504,278
    
    
    $
    1,511,734
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VALLEY NATIONAL GASES INCORPORATED
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 BASIS OF PRESENTATION:
   ORGANIZATION
     -9-




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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     2005
    
    
    2006Balance, June 30
    
    $
    672,822
    
    
    $
    1,006,754Write-off of doubtful accounts
    
    
    (178,732
    )
    
    
    (91,196
    )Provision for doubtful accounts
    
    
    468,123
    
    
    
    95,309Balance, December 31
    
    $
    962,213
    
    
    $
    1,010,867
    June 30,
    
    
    December 31,2006
    
    
    2006(Unaudited)Hard goods
    
    $
    10,913,055
    
    
    $
    12,515,107Gases
    
    
    2,345,903
    
    
    
    3,541,257Reserves
    
    
    (348,278
    )
    
    
    (841,766
    )$
    12,910,680
    
    
    $
    15,214,598
  -10-




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For the Six Months EndedDecember 31,2005
    
    2006Non-cash financing activity and investing activity __Fixed asset purchases in accounts payable
    
    
    270,656
    
    
    
    486,023Dividend payable
    
    
    961,377
    
    
    
    ___Non-cash adjustment to goodwill
    
    
    570,221
    
    
    
    ___
   ACQUISITIONS:
    Cash and cash equivalents
    
    $
    125Accounts receivable
    
    
    229Inventory
    
    
    385Other current assets
    
    
    4Fixed assets including cylinders, bulk
tanks and other equipment
    
    
    1,216Non-compete agreements
    
    
    250Customer relationships
    
    
    405Goodwill
    
    
    1,458Accounts payable
    
    
    (23
    )Accrued compensation
    
    
    (10
    )Other liabilities
    
    
    (67
    )Deferred income taxes
    
    
    (566
    )Non-compete agreement
    
    
    (250
    )Net assets acquired
    
    
    3,156Cash acquired
    
    
    (125
    )Total purchase price
    
    $
    3,031
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Six Months EndedDecember 31,2006
    
    2005Net sales
    
    $
    107,853,000
    
    
    $
    107,727,000Net earnings before income taxes
    
    
    12,064,000
    
    
    
    11,421,000Pro forma net earnings
    
    
    7,321,000
    
    
    
    7,377,000Pro forma diluted earnings per share
    
    $
    0.74
    
    
    $
    0.76
 GOODWILL AND INTANGIBLE ASSETS:
  Accumulated
    
    
    
    
    
    
    AccumulatedGross
    
    
    Amortization
    
    
    
    
    
    
    Amortization
    
    
    WeightedAmount
    
    
    as of
    
    
    Gross Amount as of
    
    
    as of
    
    
    Averageas of
    
    
    June 30,
    
    
    December 31, 2006
    
    
    December 31, 2006
    
    
    Amortization PeriodJune 30, 2006
    
    
    2006
    
    
    (unaudited)
    
    
    (unaudited)
    
    
    (years)Non-competition
agreements
    
    $
    8,816,980
    
    
    $
    7,791,134
    
    
    $
    9,066,980
    
    
    $
    8,044,702
    
    
    
    7.1Consulting
agreements
    
    
    150,000
    
    
    
    120,833
    
    
    
    150,000
    
    
    
    145,833
    
    
    
    3.0Customer
relationships
    
    
    4,209,123
    
    
    
    240,539
    
    
    
    4,612,903
    
    
    
    430,857
    
    
    
    15.0Total
    
    $
    13,176,103
    
    
    $
    8,152,506
    
    
    $
    13,829,883
    
    
    $
    8,621,392
  Fiscal year Ending June 30,Remainder of 2007
    
    $
    389,6312008
    
    $
    733,8452009
    
    $
    358,4642010
    
    $
    228,5932011
    
    $
    215,4822012
    
    $
    197,127
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Balance as of June 30, 2006
    
    $
    54,197,285Goodwill acquired
    
    
    1,457,713Balance as of December 31, 2006
    
    $
    55,654,998
 EARNINGS PER SHARE
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2006
    
    
    2005
    
    
    2006Net earnings available for common stock
    
    $
    4,390,710
    
    
    $
    4,070,807
    
    
    $
    6,426,525
    
    
    $
    7,320,450Basic earnings per common share:Weighted average common shares
    
    
    9,596,067
    
    
    
    9,680,786
    
    
    
    9,586,274
    
    
    
    9,674,125Basic earnings per common share
    
    $
    0.46
    
    
    $
    0.42
    
    
    $
    0.67
    
    
    $
    0.76Diluted earnings per common share:Weighted average common shares
    
    
    9,596,067
    
    
    
    9,680,786
    
    
    
    9,586,274
    
    
    
    9,674,125Shares issuable from assumed
conversion of common stock equivalents
    
    
    156,720
    
    
    
    160,144
    
    
    
    151,241
    
    
    
    163,911Weighted average common and common
equivalent shares
    
    
    9,752,787
    
    
    
    9,840,930
    
    
    
    9,737,515
    
    
    
    9,838,036Diluted earnings per common share
    
    $
    0.45
    
    
    $
    0.41
    
    
    $
    0.66
    
    
    $
    0.74
  LEASE OBLIGATIONS
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Fiscal year ending
    
    
    
    
    
    
    
    
    
    
    
    
    
    Elimination
    
    
    FinalJune 30,
    
    Real Estate
    
    
    Equipment
    
    
    Subtotal
    
    
    (1)
    
    
    TotalRemainder of 2007
    
    $
    2,281,287
    
    
    $
    28,684
    
    
    $
    2,309,971
    
    
    $
    1,340,880
    
    
    $
    969,0912008
    
    
    4,554,384
    
    
    
    
    
    
    
    4,554,384
    
    
    
    2,624,393
    
    
    
    1,929,9912009
    
    
    4,709,233
    
    
    
    
    
    
    
    4,709,233
    
    
    
    2,713,622
    
    
    
    1,995,6112010
    
    
    4,869,347
    
    
    
    
    
    
    
    4,869,347
    
    
    
    2,805,885
    
    
    
    2,063,4622011
    
    
    5,034,905
    
    
    
    
    
    
    
    5,034,905
    
    
    
    2,901,285
    
    
    
    2,133,620Thereafter
    
    
    5,206,092
    
    
    
    
    
    
    
    5,206,092
    
    
    
    2,999,929
    
    
    
    2,206,163Totals
    
    $
    26,655,248
    
    
    $
    28,684
    
    
    $
    26,683,932
    
    
    $
    15,385,994
    
    
    $
    11,297,938
 
 (1)
    
    Reflects the elimination of intercompany rent as a result of FIN 46R, Consolidation of
Variable Interest Entities. STOCK OPTIONS
   Number of
    
    
    Range of
    
    
    Weighted AverageShares
    
    
    Exercise Price
    
    
    Exercise PriceOutstanding, June 30, 2006
    
    
    277,735
    
    
    $
    3.125 - $21.280
    
    
    $
    9.39Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    25,235
    
    
    $
    3.125 - $8.00
    
    
    $
    6.23Cancelled
    
    
    
    
    
    
    
    
    
    
    Outstanding, December 31, 2006
    
    
    252,500
    
    
    $
    3.125 - $21.280
    
    
    $
    9.73
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WeightedNumber of
    
    AverageShares
    
    Exercise PriceOptions Exercisable at:December 31, 2006
    
    
    137,500
    
    
    $
    7.20
  As of December 31, 2006Stock Options Outstanding
    
    
    Stock Options ExercisableWeighted Average
    
    
    WeightedShares Underlying
    
    
    Remaining
    
    
    Average
    
    
    Shares UnderlyingExercise Price
    
    Options Outstanding
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Options Outstanding$3.125
    
    
    10,000
    
    
    
    3.3
    
    
    $
    3.125
    
    
    
    10,0003.750
    
    
    8,000
    
    
    
    4.3
    
    
    
    3.750
    
    
    
    8,0005.625
    
    
    4,000
    
    
    
    2.3
    
    
    
    5.625
    
    
    
    4,0006.850
    
    
    15,000
    
    
    
    5.3
    
    
    
    6.850
    
    
    
    15,0008.000
    
    
    150,500
    
    
    
    6.1
    
    
    
    8.000
    
    
    
    100,50016.000
    
    
    60,000
    
    
    
    8.3
    
    
    
    
    
    
    
    21.280
    
    
    5,000
    
    
    
    9.3
    
    
    
    
    
    
    
    $9.579
    
    
    252,500
    
    
    
    6.3
    
    
    $
    7.204
    
    
    
    137,500
    COMMITMENTS AND CONTINGENCIES
 -18-




---



##### Table of Contents



VARIABLE INTEREST ENTITIES
  -19-




---



##### Table of Contents



As of December 31, 2006(unaudited)Variable InterestValley
    
    
    Entities
    
    
    Eliminations
    
    
    CompanyASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    773,946
    
    
    $
    737,788
    
    
    $
    
    
    
    $
    1,511,734Accounts receivable, net of
allowance for doubtful accounts
of $1,010,867
    
    
    24,066,700
    
    
    
    277,110
    
    
    
    (149,581
    )
    
    
    24,194,229Inventory
    
    
    15,214,598
    
    
    
    
    
    
    
    
    
    
    
    15,214,598Prepaids and other
    
    
    1,958,281
    
    
    
    12,565
    
    
    
    
    
    
    
    1,970,846Current deferred tax asset
    
    
    2,800,659
    
    
    
    
    
    
    
    
    
    
    
    2,800,659Prepaid and refundable taxes
    
    
    502,453
    
    
    
    
    
    
    
    
    
    
    
    502,453Total current assets
    
    
    45,316,637
    
    
    
    1,027,463
    
    
    
    (149,581
    )
    
    
    46,194,519PROPERTY, PLANT AND EQUIPMENT:Land
    
    
    175,000
    
    
    
    2,032,800
    
    
    
    
    
    
    
    2,207,800Buildings and improvements
    
    
    9,506,341
    
    
    
    14,830,566
    
    
    
    
    
    
    
    24,336,907Equipment
    
    
    120,234,608
    
    
    
    1,422,995
    
    
    
    
    
    
    
    121,657,603Transportation equipment
    
    
    22,439,341
    
    
    
    173,249
    
    
    
    
    
    
    
    22,612,590Furniture and fixtures
    
    
    10,016,925
    
    
    
    187,980
    
    
    
    
    
    
    
    10,204,905Total property, plant and
equipment
    
    
    162,372,215
    
    
    
    18,647,590
    
    
    
    
    
    
    
    181,019,805Accumulated depreciation
    
    
    (62,094,722
    )
    
    
    (5,414,723
    )
    
    
    
    
    
    
    (67,509,445
    )
 -20-




---



##### Table of Contents



As of December 31, 2006(unaudited)Variable InterestValley
    
    
    Entities
    
    
    Eliminations
    
    
    CompanyNet property, plant and
equipment
    
    
    100,277,493
    
    
    
    13,232,867
    
    
    
    
    
    
    
    113,510,360OTHER ASSETS:Intangible assets, net of
accumulated amortization of $8,621,392
    
    
    5,208,491
    
    
    
    
    
    
    
    
    
    
    
    5,208,491Goodwill
    
    
    55,654,998
    
    
    
    
    
    
    
    
    
    
    
    55,654,998Deposits and other assets
    
    
    292,872
    
    
    
    20,960
    
    
    
    
    
    
    
    313,832Total other assets
    
    
    61,156,361
    
    
    
    20,960
    
    
    
    
    
    
    
    61,177,321TOTAL ASSETS
    
    $
    206,750,491
    
    
    $
    14,281,290
    
    
    $
    (149,581
    )
    
    $
    220,882,200
 -21-




---



##### Table of Contents



As of December 31, 2006(unaudited)Variable InterestValley
    
    
    Entities
    
    
    Eliminations
    
    
    CompanyLIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of long-term
debt
    
    $
    484,514
    
    
    $
    3,369,163
    
    
    $
    
    
    
    $
    3,853,677Accounts payable
    
    
    16,271,864
    
    
    
    355,115
    
    
    
    
    
    
    
    16,626,979Accrued compensation and employee
benefits
    
    
    3,775,432
    
    
    
    
    
    
    
    
    
    
    
    3,775,432Other current liabilities
    
    
    5,491,814
    
    
    
    191,531
    
    
    
    (149,581
    )
    
    
    5,533,764Total current
liabilities
    
    
    26,023,624
    
    
    
    3,915,809
    
    
    
    (149,581
    )
    
    
    29,789,852LONG-TERM DEBT, less current maturities
    
    
    59,147,865
    
    
    
    5,555,780
    
    
    
    
    
    
    
    64,703,645DEFERRED TAX LIABILITY
    
    
    35,033,989
    
    
    
    
    
    
    
    
    
    
    
    35,033,989OTHER LONG-TERM LIABILITIES
    
    
    3,306,015
    
    
    
    
    
    
    
    
    
    
    
    3,306,015Total liabilities
    
    
    123,511,493
    
    
    
    9,471,589
    
    
    
    (149,581
    )
    
    
    132,833,501MINORITY INTEREST IN VARIABLE INTEREST
ENTITIES
    
    
    
    
    
    
    
    
    
    
    4,809,701
    
    
    
    4,809,701STOCKHOLDERS EQUITY:Common stock, par value, $.001 per
share-Authorized, 30,000,000 shares;
Issued and outstanding, 9,686,959
shares
    
    
    9,687
    
    
    
    3,800
    
    
    
    (3,800
    )
    
    
    9,687Paid-in-capital
    
    
    20,312,223
    
    
    
    335,985
    
    
    
    (335,985
    )
    
    
    20,312,223Retained earnings
    
    
    62,754,865
    
    
    
    4,469,916
    
    
    
    (4,469,916
    )
    
    
    62,754,865Accumulated other comprehensive
income
    
    
    162,223
    
    
    
    
    
    
    
    
    
    
    
    162,223Total stockholders
equity
    
    
    83,238,998
    
    
    
    4,809,701
    
    
    
    (4,809,701
    )
    
    
    83,238,998TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    206,750,491
    
    
    $
    14,281,290
    
    
    $
    (149,581
    )
    
    $
    220,882,200
 -22-




---



##### Table of Contents



As of June 30, 2006Variable InterestValley
    
    
    Entities
    
    
    Eliminations
    
    
    CompanyASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    558,599
    
    
    $
    1,042,859
    
    
    $
    
    
    
    $
    1,601,458Accounts receivable, net of
allowance for doubtful accounts
of $1,006,754
    
    
    20,676,689
    
    
    
    281,990
    
    
    
    (149,581
    )
    
    
    20,809,098Inventory
    
    
    12,910,680
    
    
    
    
    
    
    
    
    
    
    
    12,910,680Prepaids and other current assets
    
    
    1,695,700
    
    
    
    10,000
    
    
    
    
    
    
    
    1,705,700Current deferred tax asset
    
    
    2,466,329
    
    
    
    
    
    
    
    
    
    
    
    2,466,329Prepaid and refundable taxes
    
    
    296,843
    
    
    
    
    
    
    
    
    
    
    
    296,843Total current assets
    
    
    38,604,840
    
    
    
    1,334,849
    
    
    
    (149,581
    )
    
    
    39,790,108PROPERTY, PLANT AND EQUIPMENT:Land
    
    
    175,000
    
    
    
    2,009,191
    
    
    
    
    
    
    
    2,184,191Buildings and improvements
    
    
    9,161,331
    
    
    
    14,419,978
    
    
    
    
    
    
    
    23,581,309Equipment
    
    
    117,395,829
    
    
    
    1,400,032
    
    
    
    
    
    
    
    118,795,861Transportation equipment
    
    
    21,372,219
    
    
    
    173,249
    
    
    
    
    
    
    
    21,545,468Furniture and fixtures
    
    
    9,428,384
    
    
    
    185,507
    
    
    
    
    
    
    
    9,613,891Total property, plant and
equipment
    
    
    157,532,763
    
    
    
    18,187,957
    
    
    
    
    
    
    
    175,720,720Accumulated depreciation
    
    
    (58,654,352
    )
    
    
    (5,200,516
    )
    
    
    
    
    
    
    (63,854,868
    )Net property, plant and
equipment
    
    
    98,878,411
    
    
    
    12,987,441
    
    
    
    
    
    
    
    111,865,852OTHER ASSETS:Intangible assets, net of
accumulated amortization of $8,152,506
    
    
    5,022,376
    
    
    
    1,221
    
    
    
    
    
    
    
    5,023,597Goodwill
    
    
    54,197,285
    
    
    
    
    
    
    
    
    
    
    
    54,197,285Deposits and other assets
    
    
    511,987
    
    
    
    19,783
    
    
    
    
    
    
    
    531,770Total other assets
    
    
    59,731,648
    
    
    
    21,004
    
    
    
    
    
    
    
    59,752,652TOTAL ASSETS
    
    $
    197,214,899
    
    
    $
    14,343,294
    
    
    $
    (149,581
    )
    
    $
    211,408,612
 -23-




---



##### Table of Contents



As of June 30, 2006VariableInterestValley
    
    
    Entities
    
    
    Eliminations
    
    
    CompanyLIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of long-term
debt
    
    $
    647,832
    
    
    $
    3,214,083
    
    
    $
    
    
    
    $
    3,861,915Accounts payable
    
    
    12,189,031
    
    
    
    333,880
    
    
    
    
    
    
    
    12,522,911Accrued compensation and
employee benefits
    
    
    4,967,701
    
    
    
    
    
    
    
    
    
    
    
    4,967,701Other current liabilities
    
    
    5,690,603
    
    
    
    149,626
    
    
    
    (149,581
    )
    
    
    5,690,648Total current liabilities
    
    
    23,495,167
    
    
    
    3,697,589
    
    
    
    (149,581
    )
    
    
    27,043,175LONG-TERM DEBT, less current maturities
    
    
    61,204,628
    
    
    
    5,474,372
    
    
    
    
    
    
    
    66,679,000DEFERRED TAX LIABILITY
    
    
    34,042,445
    
    
    
    
    
    
    
    
    
    
    
    34,042,445OTHER LONG-TERM LIABILITIES
    
    
    2,861,058
    
    
    
    
    
    
    
    
    
    
    
    2,861,058Total liabilities
    
    
    121,603,298
    
    
    
    9,171,961
    
    
    
    (149,581
    )
    
    
    130,625,678COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN VARIABLE INTEREST
ENTITIES
    
    
    
    
    
    
    
    
    
    
    5,171,333
    
    
    
    5,171,333STOCKHOLDERS EQUITY:Common stock, par value, $.001
Per share-
Authorized, 30,000,000 shares;
Issued and outstanding, 9,661,724
shares
    
    
    9,662
    
    
    
    3,800
    
    
    
    (3,800
    )
    
    
    9,662Paid-in-capital
    
    
    19,867,665
    
    
    
    335,985
    
    
    
    (335,985
    )
    
    
    19,867,665Retained earnings
    
    
    55,434,415
    
    
    
    4,831,548
    
    
    
    (4,831,548
    )
    
    
    55,434,415Accumulated other comprehensive Income
    
    
    299,859
    
    
    
    
    
    
    
    
    
    
    
    299,859Total stockholders equity
    
    
    75,611,601
    
    
    
    5,171,333
    
    
    
    (5,171,333
    )
    
    
    75,611,601TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    197,214,899
    
    
    $
    14,343,294
    
    
    $
    (149,581
    )
    
    $
    211,408,612
 -24-




---



##### Table of Contents



VariableInterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyNET SALES
    
    $
    107,392,677
    
    
    $
    1,303,791
    
    
    $
    (1,303,791
    )
    
    $
    107,392,677COSTS AND EXPENSESCost of products sold, excluding
depreciation
    
    
    52,898,341
    
    
    
    
    
    
    
    
    
    
    
    52,898,341Operating, distribution and
administrative
    
    
    34,777,138
    
    
    
    526,950
    
    
    
    (1,303,791
    )
    
    
    34,000,297Depreciation
    
    
    3,935,529
    
    
    
    276,862
    
    
    
    
    
    
    
    4,212,391Amortization of intangibles
    
    
    468,886
    
    
    
    
    
    
    
    
    
    
    
    468,886Merger-related costs
    
    
    1,494,585
    
    
    
    
    
    
    
    
    
    
    
    1,494,585Gain on disposal of assets
    
    
    (6,713
    )
    
    
    (94,904
    )
    
    
    
    
    
    
    (101,617
    )Total costs and expenses
    
    
    93,567,766
    
    
    
    708,908
    
    
    
    (1,303,791
    )
    
    
    92,972,883INCOME FROM OPERATIONS
    
    
    13,824,911
    
    
    
    594,883
    
    
    
    
    
    
    
    14,419,794INTEREST EXPENSE
    
    
    1,909,062
    
    
    
    284,874
    
    
    
    
    
    
    
    2,193,936OTHER INCOME, NET
    
    
    (147,509
    )
    
    
    (174,622
    )
    
    
    
    
    
    
    (322,131
    )EARNINGS BEFORE MINORITY INTEREST
    
    
    12,063,358
    
    
    
    484,631
    
    
    
    
    
    
    
    12,547,989MINORITY INTEREST
    
    
    
    
    
    
    484,631
    
    
    
    
    
    
    
    484,631NET EARNINGS BEFORE TAXES
    
    
    12,063,358
    
    
    
    
    
    
    
    
    
    
    
    12,063,358PROVISION FOR INCOME TAXES
    
    
    4,742,908
    
    
    
    
    
    
    
    
    
    
    
    4,742,908NET EARNINGS
    
    $
    7,320,450
    
    
    $
    
    
    
    $
    
    
    
    $
    7,320,450
  VariableInterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyNET SALES
    
    $
    98,081,347
    
    
    $
    1,187,890
    
    
    $
    (1,187,890
    )
    
    $
    98,081,347COSTS AND EXPENSESCost of products sold, excluding
depreciation
    
    
    48,378,808
    
    
    
    
    
    
    
    
    
    
    
    48,378,808Operating, distribution and
administrative
    
    
    33,647,716
    
    
    
    420,651
    
    
    
    (1,187,890
    )
    
    
    32,880,477Depreciation
    
    
    3,507,919
    
    
    
    289,997
    
    
    
    
    
    
    
    3,797,916Amortization of intangibles
    
    
    458,437
    
    
    
    
    
    
    
    
    
    
    
    458,437Gain on disposal of assets
    
    
    (36,332
    )
    
    
    (28,683
    )
    
    
    
    
    
    
    (65,015
    )Total costs and expenses
    
    
    85,956,548
    
    
    
    681,965
    
    
    
    (1,187,890
    )
    
    
    85,450,623INCOME FROM OPERATIONS
    
    
    12,124,799
    
    
    
    505,925
    
    
    
    
    
    
    
    12,630,724INTEREST EXPENSE
    
    
    1,898,323
    
    
    
    174,248
    
    
    
    
    
    
    
    2,072,571OTHER INCOME, NET
    
    
    (207,739
    )
    
    
    (112,802
    )
    
    
    
    
    
    
    (320,541
    )EARNINGS BEFORE MINORITY INTEREST
    
    
    10,434,215
    
    
    
    444,479
    
    
    
    
    
    
    
    10,878,694MINORITY INTEREST
    
    
    
    
    
    
    444,479
    
    
    
    
    
    
    
    444,479NET EARNINGS BEFORE TAXES
    
    
    10,434,215
    
    
    
    
    
    
    
    
    
    
    
    10,434,215PROVISION FOR INCOME TAXES
    
    
    4,007,690
    
    
    
    
    
    
    
    
    
    
    
    4,007,690NET EARNINGS
    
    $
    6,426,525
    
    
    $
    
    
    
    $
    
    
    
    $
    6,426,525
 -25-




---



##### Table of Contents



VariableInterestValley
    
    
    Entities
    
    
    Eliminations
    
    
    CompanyNET SALES
    
    $
    56,781,936
    
    
    $
    656,995
    
    
    $
    (656,995
    )
    
    $
    56,781,936COSTS AND EXPENSESCost of products sold, excluding
depreciation
    
    
    27,923,101
    
    
    
    
    
    
    
    
    
    
    
    27,923,101Operating, distribution and
administrative
    
    
    17,586,032
    
    
    
    190,294
    
    
    
    (656,995
    )
    
    
    17,119,331Depreciation
    
    
    2,037,546
    
    
    
    139,368
    
    
    
    
    
    
    
    2,176,914Amortization of intangibles
    
    
    228,833
    
    
    
    
    
    
    
    
    
    
    
    228,833Merger-related costs
    
    
    1,494,585
    
    
    
    
    
    
    
    
    
    
    
    1,494,585Gain on disposal of assets
    
    
    (14,770
    )
    
    
    (94,904
    )
    
    
    
    
    
    
    (109,674
    )Total costs and expenses
    
    
    49,255,327
    
    
    
    234,758
    
    
    
    (656,995
    )
    
    
    48,833,090INCOME FROM OPERATIONS
    
    
    7,526,609
    
    
    
    422,237
    
    
    
    
    
    
    
    7,948,846INTEREST EXPENSE
    
    
    888,562
    
    
    
    158,965
    
    
    
    
    
    
    
    1,047,527OTHER INCOME, NET
    
    
    (79,250
    )
    
    
    (63,593
    )
    
    
    
    
    
    
    (142,843
    )EARNINGS BEFORE MINORITY INTEREST
    
    
    6,717,297
    
    
    
    326,865
    
    
    
    
    
    
    
    7,044,162MINORITY INTEREST
    
    
    
    
    
    
    326,865
    
    
    
    
    
    
    
    326,865NET EARNINGS BEFORE TAXES
    
    
    6,717,297
    
    
    
    
    
    
    
    
    
    
    
    6,717,297PROVISION FOR INCOME TAXES
    
    
    2,646,490
    
    
    
    
    
    
    
    
    
    
    
    2,646,490NET EARNINGS
    
    $
    4,070,807
    
    
    
    
    
    
    
    
    
    
    $
    4,070,807
  VariableInterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyNET SALES
    
    $
    56,418,116
    
    
    $
    600,896
    
    
    $
    (600,896
    )
    
    $
    56,418,116COSTS AND EXPENSESCost of products sold, excluding
depreciation
    
    
    28,426,906
    
    
    
    
    
    
    
    
    
    
    
    28,426,906Operating, distribution and
administrative
    
    
    17,845,061
    
    
    
    199,071
    
    
    
    (600,896
    )
    
    
    17,443,236Depreciation
    
    
    1,854,519
    
    
    
    151,015
    
    
    
    
    
    
    
    2,005,534Amortization of intangibles
    
    
    219,580
    
    
    
    
    
    
    
    
    
    
    
    219,580Gain on disposal of assets
    
    
    (27,557
    )
    
    
    
    
    
    
    
    
    
    
    (27,557
    )Total costs and expenses
    
    
    48,318,509
    
    
    
    350,086
    
    
    
    (600,896
    )
    
    
    48,067,699INCOME FROM OPERATIONS
    
    
    8,099,607
    
    
    
    250,810
    
    
    
    
    
    
    
    8,350,417INTEREST EXPENSE
    
    
    1,081,301
    
    
    
    100,314
    
    
    
    
    
    
    
    1,181,615OTHER INCOME, NET
    
    
    (78,506
    )
    
    
    (36,842
    )
    
    
    
    
    
    
    (115,348
    )EARNINGS BEFORE MINORITY INTEREST
    
    
    7,096,812
    
    
    
    187,338
    
    
    
    
    
    
    
    7,284,150MINORITY INTEREST
    
    
    
    
    
    
    187,338
    
    
    
    
    
    
    
    187,338NET EARNINGS BEFORE TAXES
    
    
    7,096,812
    
    
    
    
    
    
    
    
    
    
    
    7,096,812PROVISION FOR INCOME TAXES
    
    
    2,706,102
    
    
    
    
    
    
    
    
    
    
    
    2,706,102NET EARNINGS
    
    $
    4,390,710
    
    
    
    
    
    
    
    
    
    
    $
    4,390,710
 SUMMARY BY BUSINESS SEGMENT
  -26-




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Six Months Ended December 31, 2006(In Thousands)PackagedHard Goods
    
    
    Gases
    
    
    Propane
    
    

VIEs
    
    
    Unallocated
    
    
    Eliminations
    
    
    CombinedSales
    
    $
    44,121
    
    
    $
    38,306
    
    
    $
    24,966
    
    
    $
    1,304
    
    
    $
    ___
    
    
    $
    (1,304
    )
    
    $
    107,393Cost of products sold
    
    
    29,226
    
    
    
    9,323
    
    
    
    14,349
    
    
    
    ___
    
    
    
    ___
    
    
    
    ___
    
    
    
    52,898Gross profit
    
    
    14,895
    
    
    
    28,983
    
    
    
    10,617
    
    
    
    1,304
    
    
    
    ___
    
    
    
    (1,304
    )
    
    
    54,495Operating,
distribution, and
administrative
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    527
    
    
    
    34,778
    
    
    
    (1,304
    )
    
    
    34,001Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    277
    
    
    
    3,935
    
    
    
    
    
    
    
    4,212Amortization expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ___
    
    
    
    469
    
    
    
    
    
    
    
    469Merger-related costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ___
    
    
    
    1,495
    
    
    
    
    
    
    
    1,495Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (95
    )
    
    
    (7
    )
    
    
    
    
    
    
    (102
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    285
    
    
    
    1,909
    
    
    
    
    
    
    
    2,194Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174
    
    
    
    148
    
    
    
    
    
    
    
    322Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    485
    
    
    
    ___
    
    
    
    
    
    
    
    485Net earnings before
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,063
 -27-




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##### Table of Contents



Six Months Ended December 31, 2005 (1)(In Thousands)PackagedHard Goods
    
    
    Gases
    
    
    Propane
    
    

VIEs
    
    
    Unallocated
    
    
    Eliminations
    
    
    CombinedSales
    
    $
    37,911
    
    
    $
    32,831
    
    
    $
    27,339
    
    
    $
    1,188
    
    
    $
    ___
    
    
    $
    (1,188
    )
    
    $
    98,081Cost of products sold
    
    
    24,851
    
    
    
    7,856
    
    
    
    15,672
    
    
    
    ___
    
    
    
    ___
    
    
    
    ___
    
    
    
    48,379Gross profit
    
    
    13,060
    
    
    
    24,975
    
    
    
    11,667
    
    
    
    1,188
    
    
    
    ___
    
    
    
    (1,188
    )
    
    
    49,702Operating,
distribution, and
administrative
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    421
    
    
    
    33,648
    
    
    
    (1,188
    )
    
    
    32,881Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    290
    
    
    
    3,508
    
    
    
    
    
    
    
    3,798Amortization expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ___
    
    
    
    458
    
    
    
    
    
    
    
    458Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    (36
    )
    
    
    
    
    
    
    (65
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174
    
    
    
    1,899
    
    
    
    
    
    
    
    2,073Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113
    
    
    
    208
    
    
    
    
    
    
    
    321Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    444
    
    
    
    ___
    
    
    
    
    
    
    
    444Net earnings before
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,434
 Three Months Ended December 31, 2006(In Thousands)PackagedHard Goods
    
    
    Gases
    
    
    Propane
    
    

VIEs
    
    
    Unallocated
    
    
    Eliminations
    
    
    CombinedSales
    
    $
    21,998
    
    
    $
    18,991
    
    
    $
    15,793
    
    
    $
    657
    
    
    $
    ___
    
    
    $
    (657
    )
    
    $
    56,782Cost of products sold
    
    
    14,275
    
    
    
    4,625
    
    
    
    9,023
    
    
    
    ___
    
    
    
    ___
    
    
    
    ___
    
    
    
    27,923Gross profit
    
    
    7,723
    
    
    
    14,366
    
    
    
    6,770
    
    
    
    657
    
    
    
    ___
    
    
    
    (657
    )
    
    
    28,859Operating,
distribution, and
administrative
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190
    
    
    
    17,586
    
    
    
    (657
    )
    
    
    17,119Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    2,038
    
    
    
    
    
    
    
    2,177Amortization expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ___
    
    
    
    229
    
    
    
    
    
    
    
    229Merger-related costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ___
    
    
    
    1,495
    
    
    
    
    
    
    
    1,495Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (95
    )
    
    
    (15
    )
    
    
    
    
    
    
    (110
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159
    
    
    
    889
    
    
    
    
    
    
    
    1,048Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    79
    
    
    
    
    
    
    
    143Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    327
    
    
    
    ___
    
    
    
    
    
    
    
    327Net earnings before
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,717
 Three Months Ended December 31, 2005 (1)(In Thousands)PackagedHard Goods
    
    
    Gases
    
    
    Propane
    
    

VIEs
    
    
    Unallocated
    
    
    Eliminations
    
    
    CombinedSales
    
    $
    20,146
    
    
    $
    17,333
    
    
    $
    18,939
    
    
    $
    601
    
    
    $
    ___
    
    
    $
    (601
    )
    
    $
    56,418Cost of products sold
    
    
    13,362
    
    
    
    4,240
    
    
    
    10,825
    
    
    
    ___
    
    
    
    ___
    
    
    
    ___
    
    
    
    28,427Gross profit
    
    
    6,784
    
    
    
    13,093
    
    
    
    8,114
    
    
    
    601
    
    
    
    ___
    
    
    
    (601
    )
    
    
    27,991Operating,
distribution, and
administrative
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    199
    
    
    
    17,844
    
    
    
    (601
    )
    
    
    17,442Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    151
    
    
    
    1,855
    
    
    
    
    
    
    
    2,006Amortization expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ___
    
    
    
    220
    
    
    
    
    
    
    
    220Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ___
    
    
    
    (28
    )
    
    
    
    
    
    
    (28
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    1,082
    
    
    
    
    
    
    
    1,182Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    78
    
    
    
    
    
    
    
    115Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187
    
    
    
    ___
    
    
    
    
    
    
    
    187Net earnings before
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,097
 
 (1)
    
    The six and three months ended December 31, 2005 were restated to conform to our current
segment reporting requirements. 
 Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
  -28-




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-29-




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-30-




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##### Table of Contents



TRADE RECEIVABLES
  INVENTORIES
  GOODWILL AND OTHER INTANGIBLE ASSETS
  EMPLOYEE HEALTH CARE BENEFITS RESERVES
  -31-




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VALUATION OF LONG-LIVED ASSETS
  INCOME TAXES
    Three Months Ended
    
    Six Months EndedDecember 31,
    
    December 31,2006
    
    2005
    
    2006
    
    2005Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of products sold, excluding
depreciation
    
    
    49.2
    
    
    
    50.4
    
    
    
    49.3
    
    
    
    49.3Operating, distribution and
administrative
    
    
    30.2
    
    
    
    30.8
    
    
    
    31.7
    
    
    
    33.5Depreciation
    
    
    3.8
    
    
    
    3.6
    
    
    
    3.9
    
    
    
    3.8Amortization of intangibles
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.5Merger-related costs
    
    
    2.6
    
    
    
    
    
    
    
    1.4
    
    
    
    Total costs and expenses
    
    
    86.2
    
    
    
    85.2
    
    
    
    86.7
    
    
    
    87.1Income from operations
    
    
    13.8
    
    
    
    14.8
    
    
    
    13.3
    
    
    
    12.9Interest expense
    
    
    1.8
    
    
    
    2.1
    
    
    
    2.0
    
    
    
    2.1Other income, net
    
    
    0.5
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.4Earnings before minority interest
    
    
    12.5
    
    
    
    13.0
    
    
    
    11.7
    
    
    
    11.2Minority interest
    
    
    0.6
    
    
    
    0.3
    
    
    
    0.5
    
    
    
    0.5Net earnings before taxes
    
    
    11.9
    
    
    
    12.7
    
    
    
    11.2
    
    
    
    10.7Provision for income taxes
    
    
    4.7
    
    
    
    4.8
    
    
    
    4.4
    
    
    
    4.1Net earnings
    
    
    7.2
    %
    
    
    7.9
    %
    
    
    6.8
    %
    
    
    6.6
    %
 Comparison of Three Months Ended December 31, 2006 and 2005
  -32-




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-33-




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Comparison of Six Months Ended December 31, 2006 and 2005
     -34-




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Payments Due By Period (In Thousands)Less Than
    
    
    1-3
    
    
    4-5
    
    
    More ThanContractual Obligations
    
    Total
    
    
    6 Months
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-Term Debt
Including Current
Maturities
    
    $
    68,557
    
    
    $
    3,267
    
    
    $
    61,698
    
    
    $
    1,405
    
    
    $
    2,187Estimated Interest
Payments
    
    
    14,527
    
    
    
    2,210
    
    
    
    11,708
    
    
    
    455
    
    
    
    154Interest Rate Swap
Payments
    
    
    1,333
    
    
    
    513
    
    
    
    820
    
    
    
    
    
    
    
    Interest Rate Swap
Receipts
    
    
    (1,755
    )
    
    
    (675
    )
    
    
    (1,080
    )
    
    
    
    
    
    
    Operating Leases, Net
of Intercompany
Eliminations
    
    
    11,298
    
    
    
    969
    
    
    
    5,989
    
    
    
    4,340
    
    
    
    Purchase Obligations
    
    
    1,540
    
    
    
    770
    
    
    
    770
    
    
    
    
    
    
    
    Total Obligations
    
    $
    95,500
    
    
    $
    7,054
    
    
    $
    79,905
    
    
    $
    6,200
    
    
    $
    2,341
 -35-




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-36-




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##### Table of Contents



Variable InterestFiscal year ending June 30,
    
    Valley
    
    
    Entities
    
    
    CompanyRemainder of 2007
    
    $
    275,324
    
    
    $
    2,991,827
    
    
    $
    3,267,1512008
    
    $
    420,106
    
    
    $
    761,585
    
    
    $
    1,181,6912009
    
    $
    58,811,301
    
    
    $
    790,281
    
    
    $
    59,601,5822010
    
    $
    93,623
    
    
    $
    821,168
    
    
    $
    914,7912011
    
    $
    32,025
    
    
    $
    758,499
    
    
    $
    790,5242012
    
    $
    
    
    
    $
    614,658
    
    
    $
    614,658Thereafter
    
    $
    
    
    
    $
    2,186,925
    
    
    $
    2,186,925Total
    
    $
    59,632,379
    
    
    $
    8,924,943
    
    
    $
    68,557,322
         -37-




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Balance of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    There
    
    
    
    
    
    
    Fair2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    After
    
    
    Total
    
    
    Value(In Thousands)LiabilitiesLong term debt  ValleyFixed rate
    
    $
    275
    
    
    $
    420
    
    
    $
    236
    
    
    $
    94
    
    
    $
    32
    
    
    $
    
    
    
    $
    1,057
    
    
    $
    924Average interest rate
    
    
    5.59
    %
    
    
    4.29
    %
    
    
    3.16
    %
    
    
    4.76
    %
    
    
    5.96
    %Variable rate
    
    
    
    
    
    
    
    
    
    
    58,575
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    58,575
    
    
    $
    58,575Average interest rate
    
    
    
    
    
    
    
    
    
    
    6.35
    %Long term debt-Variable InterestEntities mortgage debtFixed rate
    
    $
    2,992
    
    
    $
    762
    
    
    $
    790
    
    
    $
    821
    
    
    $
    758
    
    
    $
    2,802
    
    
    $
    8,925
    
    
    $
    7,189Average interest rate
    
    
    7.18
    %
    
    
    7.43
    %
    
    
    7.09
    %
    
    
    7.10
    %
    
    
    7.11
    %
    
    
    7.13
    %Interest rate swapsVariable to fixed
    
    $
    
    
    
    $
    
    
    
    $
    25,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    270Average pay rate
    
    
    
    
    
    
    
    
    
    
    4.1
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average receive rate
    
    
    
    
    
    
    
    
    
    
    5.4
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    CommitmentsOperating leases
    
    $
    2,310
    
    
    $
    4,554
    
    
    $
    4,709
    
    
    $
    4,869
    
    
    $
    5,035
    
    
    $
    5,206
    
    
    $
    26,683Intercompany
elimination (1)
    
    
    (1,341
    )
    
    
    (2,624
    )
    
    
    (2,714
    )
    
    
    (2,806
    )
    
    
    (2,901
    )
    
    
    (3,000
    )
    
    
    (15,386
    )Company total
    
    $
    969
    
    
    $
    1,930
    
    
    $
    1,995
    
    
    $
    2,063
    
    
    $
    2,134
    
    
    $
    2,206
    
    
    $
    11,297
 
 (1)
    
    Reflects the elimination of intercompany rent as a result of FIN 46R,
Consolidation of Variable Interest Entities at December 31, 2006. -38-




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##### Table of Contents



Item 4. Controls and Procedures
     
 PART II. OTHER INFORMATION
 
 Item 6. Exhibit Index
 31.1
    
    Certification of the Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of the Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 -39-




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##### Table of Contents



SIGNATURES
  VALLEY NATIONAL GASES INCORPORATEDFebruary 9, 2007
    /s/  James P. HartJames P. HartChief Financial Officer and
Duly Authorized Officer -40-